Majedie UK Income – a difficult 18 months

Heather Ferguson | Mon 20 March 2017

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• A focus on dividend growth and a bias to medium-sized companies remains
• The managers are positive on the prospects for financial and oil & gas companies
• Performance over the past 18 months has been weak but long term returns remain strong

Our view

Chris Reid and Yuri Khodjamirian, managers of the Majedie UK Income Fund differ from the majority of their peers in that they favour higher-risk small and medium-sized companies over large blue-chip stocks.

Long term performance has been strong; however, this positioning has held back performance over the past 18 months as larger companies have outperformed their smaller counterparts. Elsewhere, although exposure has recently increased, the fund spent the majority of this period with less exposure to the oil & gas sector than the index. This held back relative returns as these companies have generally performed well.

Performance

Over the longer term a bias to small and medium-sized companies has aided returns, as has the managers’ good stock selection (although past performance is not a guide to the future). The managers are incentivised to perform well as they often invest their own money alongside their investors and have bonuses linked to the fund’s returns. We are confident in their ability to add value for investors over the long term and the fund remains on the Wealth 150 list of our favourite funds across the major sectors.

Past performance is not a guide to the future. Source: Lipper IM* to 28/02/2017

Managers' outlook and fund positioning

Sterling weakness has driven up the cost of imports to the UK and the managers expect inflation to rise over the coming months as a result. Coupled with low wage growth, this could lead to reduced consumer spending as people have less disposable income. With this view in mind, the managers have reduced exposure to companies that provide non-essential consumer products.

The managers are focused on companies with improving prospects, and an increasingly competitive position relative to their peers. They also favour businesses with a strong balance sheet, able to support both dividend payments and investments to grow the business. The managers have recently found a large number of companies with these characteristics in the financials and oil & gas sectors.

The fund is concentrated at around 57 holdings, which allows each position to have a greater impact on returns, but is higher-risk.

Financials

Almost 40% of the fund is invested in the financials sector. Before 2008, companies in this area were generally focused on maximising profits through leverage (lending out more money than they held on deposit). As they are now required to hold more cash, banks have focused on growing profits through operational improvements (updating processes and technology to make them more efficient). The managers view this positively as it has made banks more profitable, and left them in a stronger financial position.

Oil & gas

Just under 20% of the fund is invested in oil & gas companies. The managers feel the recent OPEC agreement to reduce oil production combined with lower global inventories means the oil price has bottomed. The industry has cut costs considerably over the past few years and many companies in this area now generate healthy levels of cash. The managers are confident the sector will offer higher and more secure dividends in the future but are cognisant it remains early days so will tread cautiously.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.